Economic political views

[Carlos G.]

Well, since the economy is in many cases tightly linked to political issues, let's open a thread to debate the economical side our world. And let's start with this news:

U.S. Economy: Factory Orders Gain, Companies Cut Jobs

Feb. 4 (Bloomberg) -- Orders to U.S. factories rose in December by the most in five months, indicating business spending on new equipment is growing even as hiring falters.
The 2.3 percent increase follows a revised 1.7 percent advance the prior month, the Commerce Department said today in Washington. The median forecast in a Bloomberg News survey projected a gain of 2.5 percent. Excluding orders for transportation equipment, demand climbed 0.7 percent.
Exports and gains in investment may help prevent a collapse in manufacturing as the housing slump and a slowdown in consumer spending push the economy to the brink of a recession. (...)
The increase in factory orders was led by a 5 percent gain in demand for durable goods, such as airplanes and computers, that are meant to least several years. The rise was less than the government estimated last week. Bookings for non-durable goods dropped 0.4 percent, led by declines in petroleum and beverage products. (...)
Faster growth outside the U.S. has lifted demand from overseas and helped companies offset some of the slowdown in domestic purchases, economists said. Shipments to overseas buyers in November set a ninth consecutive monthly record, the Commerce Department said last month.
Bookings for transportation equipment rose 12 percent. Aircraft orders also increased 12 percent. Boeing, the world's second-biggest airplane maker, received 287 orders in December, most of those from overseas, up from the 177 the prior month. (...) Computer orders increased 4.6 percent in December and machinery demand jumped 7.3 percent, the most since December 2006.

http://www.bloomberg.com/apps/news?pid= ... refer=home

Today the barrel's price climbed as a response to these news, comentators say. They think recession will not hit the US economy as predicted though jobs are being reduced and domestic sales dropped. Now I ask: are these orders being executed with less workers/employees? This would mean a rise in productivity, right? A fall in domestic sale figures are most likely due to limitations in personal credits, I think. David Hilditch, the carpet is fully yours.

[David Hilditch]

Honestly, Carlos, I don't think this is telling us very much - it's just one small report covering one set of data over one short period. Also, unless you want to take a view of not less than 5 years, short-term figures on job growth or wholesale equipment orders are not really that closely related. The former are what are called lagging indicators and the latter leading indicators. Job statistics tend to fall late into a recession or downturn and rise late into a recovery, while wholesale orders do the reverse (and what is more, the latter are skewed by exports and by big ticket items such as aircraft). The name of the game now is all about calling the bottom of the downturn, maybe some time in the second half of this year.

[Carlos G.]

If the bottom of the downturn is reached some time this year I think we can speak of luck. I'd like to hear from you, David, about the threat of another crisis due to the credit card loans which is lurking under the surface as well as the ever increasing debt of the US due to its tremendous military spending. I fear both factors have the potential to widen the time frame for this go sour in american economy.

[David Hilditch]

If the bottom of the downturn is reached some time this year I think we can speak of luck. I'd like to hear from you, David, about the threat of another crisis due to the credit card loans which is lurking under the surface as well as the ever increasing debt of the US due to its tremendous military spending. I fear both factors have the potential to widen the time frame for this go sour in american economy.

Lots of things here. I think you're mixing up short-term and long-term challenges here. There is a misconception about military spending. The US is spending far less on the military today than for many decades as a proportion of GDP. It's about 4% today versus 9% at the height of Vietnam and 14% at the time of the Korean war. Some would argue the need to pay more for the military to rebuild the armed forces, replace worn out and lost equipment and add to long-term care for wounded soldiers.

So it won't be military spending that will be the short-term problem for the US economy. To the extent that it adds to overall federal debt it will contribute but even long-term it is still small beer. The real drain on future spending will be entitlement programs, which will double in relation to GDP in the next 20 years, during a period when it is hard to see the twin deficits in federal spending and trade diminish very much. In the context, then, of the continuing overall indebtedness of the American economy, entitlement programs will pose the severest challenge and require major adjustments in the way Americans live.

Coming to the present, I don't think there will be a specific credit card crisis as such. I think we sort of have it already, along with the housing and personal debt "crisis". There does seem to be a considerable adjustment already going on with cutbacks in domestic consumption. A lot of those cutbacks, however, merely change the direction of spending (eg. towards high energy costs, higher healthcare costs) rather than cause a reduction in the overall size of the economy. But there's no doubt there's a pretty sharp downturn right now in retail, housing, consumer etc.. No-one knows how severe it will be and/or how long-lasting, and you will see conflicting data in the next few months. The freewheeling days of credit and spending against future income may be constrained, which will have huge implications for the economy, though there are still inflationary pressures as well as deflationary pressures.